CFA Practice Question

CFA Practice Question

Beth Moseley is a portfolio manager for First City Investments. She manages pension portfolios for a number of large publicly traded corporations. Due to the large volume of transactions, she directs her trades to a handful of brokerage firms to get better commission rates. She has an oral quid-pro-quo arrangement with Brigham Securities, which executes some of her trades. In exchange for trades referred to Brigham by Beth, Brigham recommends her services as a portfolio manager to anyone seeking a referral.
A. Beth is in violation of Standard VI (C) - Referral fees.
B. Beth is in violation of Standard IV (B) - Additional Compensation Arrangements.
C. Beth is in violation of Standard VI (A) - Disclosure of Conflicts.
Explanation: Beth is in violation of Standard VI (A) as she has not disclosed this relationship to her clients. She should get the best price and execution for her clients; there is no guarantee that such an arrangement would not compromise her independence and objectivity. Her clients' interests come before her firm's.

User Contributed Comments 12

User Comment
danlan Why is "Additional compensation arrangements" wrong?
mtcfa It is wrong because although Beth is being referred, she may not necessarily receive any additional compensation. My question is: what's wrong with "Referral fees"?
danlan A and B are similar, if he does not have additional compensation arrgement, we do not suppose that he gets referral fees, right?
mtcfa This question I believe has nothing really to do with additional compensation. It's a quid-pro-quo arrangement to obtain research in lieu of being referred. It's a possible conflict of interest as it may impair her judgement in selecting other, possibly less costly brokerage firms.
malley i think the reason A is wrong is that Beth herself is not referring customers to Brigham. If she were, then I think A would be the correct answer.
mirco Where does it say that Beth has not disclosed this relationship to her clients? That's an assumption. Also, where is the conflict here? Beth gets more clients (which is not a conflict) but does presumably not get the best brokerage deal for her clients. So I would argue for violation of III A - Loyalty, Prudence & Care
copus Referral fees is incorrect becuase there is no actual fee arrangement. I think that both B and C are correct, but that C is more correct. B could be correct becuase by obtaining referals, Beth is increasing the size of her client base and thereby indirectly benefitting financially becuase her employer will in all liklihood take into account the size of the asset management fees she has generated in determining her compensation. C is more correct becuase the potential violation is more immediate. A conflict of interest could arise, in that Beth could be more inclined to increase the brokerage she directs to Brigham in order to obtain more referrals.
Rob09 It is Brigham, not Beth, who would be in violation of Referral Fees (Beth only directs trades to Bringham, not clients)... C is correct.
u0302638 B is not correct as Additional Compensation Arrangement is under duty to Employer not duty to Client. The arrangement here affect the client not the employer.
A is not correct as wat copus said: Not actual fee arrangement
mekc I agree with copus and believe c to be more correct
supersimps In the textbook page 100 example 3 - it should be referal fees no?
bantoo referal fees involves any benefit, compensation and consideration. It can be cash or non cash page 135-137.

C is more correct. But B is also correct
You need to log in first to add your comment.